What Adidas’ $3B Loan Says About Its Financial Situation — Analysts Explain

A company seeking a $3 billion loan amid economic uncertainty and a global health crisis can be alarming to some. It makes sense, then, that Adidas’ approval for a syndicated loan facility worth 3 billion euros ($3.28 billion) raised eyebrows.

However, analysts who cover the German sportswear giant suggest the move is precautionary — and likely par for the course amid uncertain times.

“Their finances were fine. They just did this as a precaution. If the loans are available and are extremely low interest — or any interest at all at this point — it makes sense to take them,” explained Morningstar Research Services equity analyst David Swartz. “That doesn’t mean that they’re in any distress or that they were worried they’re going to run out of cash or anything like that.”

As evidence of Adidas’ strong financial standing, Swartz pointed to the fact that the company ended fiscal 2019 with 2.2 billion euros ($2.39 billion) in cash and cash equivalents. The company also had 292 million euros ($317.8 million) in short-term financial assets when the year concluded.

Cowen managing director John Kernan explained that Adidas’ move to secure a syndicated revolving loan facility is aimed at keeping the company surefooted for the long-term.

“It’s a lot of money. I think they’re searching for as much cash liquidity as possible. They won’t need much of that [and] it’ll be paid back really quickly — unless we’re in some catastrophic social distancing scenario globally for a long time,” Kernan said. “They’re in a very low revenue environment — despite the fact they have a good e-commerce business — and their wholesale partners are under tremendous liquidity pressures. They’re just hunkering down for a prolonged, difficult period.”

Similarly, Swartz noted that heightened uncertainty surrounding the length of the pandemic and its economic impact means companies like Adidas have to explore avenues for financial security.

“You don’t know what’s going to happen a month from now or six months from now or a year from now. It’s really just a safety net in case something terrible happens because we don’t know how long this crisis will last,” he said. “It makes sense to have as much cash on hand as you can possibly get. And going back to [the Great Recession of] 2008, this is the second totally unexpected worldwide financial crisis. If this can happen twice in 12 years, then you’ve got to be ready for the next one.”

The Morningstar analyst also indicated that other athletic companies are likely to follow in Adidas’ footsteps.

As it stands, the loan isn’t the only recent financially prudent move by Adidas that has garnered attention. On March 30, reports revealed that the company planned to tap into protection provided by Germany’s new rent-freeze legislation by withholding rent for its leased store spaces in the country during the month of April. The decision had drawn the ire of critics who accused the company of taking advantage of legislation intended to help those facing financial hardship. Shortly after, Adidas publicly apologized and said it had paid its landlords for the month.

“A lot of companies are pushing back on rent globally. Adidas is one of them. It’s a negotiation between the landlord and the tenant,” Kernan said. “Everyone’s just trying to conserve cash as much as possible. Rent is a big fixed expense on the income statement.”

Amid widespread economic challenges, Swartz also suggested that, like Adidas, many companies may seek to take advantage of a range of available resources — including government protections — to preserve cash.

“[Management’s] job is to protect Adidas and [its] shareholders. If there are possibilities of cutting spending — normally they wouldn’t think of not paying rent, but this is not a normal time and, for now, they can perhaps get away with it,” Swartz said. “So, why not? There’s not going to be any adverse consequence to them.”

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